Coping with financial emergencies

28 August, 2007:

Those familiar with financial statements know the term contingency fund. The same term becomes emergency fund in our lives. Sure, if a large company with much larger financial muscle and better resource raising capacity keeps contingency fund, then we must also follow suit.

However, the moot point is how much money exactly should one keep for unforeseen events. It assumes greater significance if you were to include inflation into the picture. For, if you are following the usual practice of keeping the money in a savings bank account, you are actually earning negative returns on it. A measly interest rate of 3.5% is just not enough to match the soaring inflation at around 8%.

Are you wasting money in the name of emergency fund? Is it really necessary to keep more than the required amount in a savings bank account? That too, when there is practically little difference between fixed deposit and savings bank account. These days, banks allow you to break a fixed deposit in no time. It also involves very little time or penal interest. They, why not keep the money in a fixed deposit? A very good strategy is to break your emergency fund into two, and keep one in the savings bank account and the other locked in a fixed deposit.

You can even go ahead and invest the money in a mutual fund or even directly in stocks. You can redeem your mutual fund units in an emergency and get the money in a couple of days. Ditto with stocks. If you are dealing with reputed brokerage, you can sell your stock and get the proceeds in a couple of days. Of course, you have to find ways to bridge the gaps of a few of days. That is what friends are there.

Or, make use of that credit card. In addition to the convenience of payments, a credit card can also be used as a source of emergency funds. Of course, the interest rates are prohibitive here. However, you can evade most of it if you repay the money immediately. Of course, cash withdrawals involve transaction charges, which you must pay.

Credit card companies are competing to convert the outstanding to personal loans these days. If you are really short of cash to repay immediately, make use of it. The interest rate is lower here. It also offers you the comfort of paying back the loan in monthly installments.

People, who are genuinely short of cash, can also approach their bank for a personal loan. Banks are pampering customers with personal loans. Make use of it. Getting a personal loan is easy with the bank where you have an account. However, you can even approach a different bank. The requirements are only your income statement and post-dated cheques. Those of you who do not want to liquidate your investments also use this route. If you are really bullish on a stock and do not want to sell it, take a personal loan. But you should be fairly sure that the returns would be substantially higher to offset the interest amount.

Finally, do you know the secret of getting rid of most of the emergency fund? Get a cashless medical insurance cover. Most people keep liquid cash to meet a medical emergency. However, you can avoid it with a cashless medical insurance cover, as you do not have to make any payments upfront. Your credit card can take care of small payments.